(This article
will be appearing in the Reason Public Policy Institute's 19th Annual Report on
Privatization in late July.)

During the early 1990s, Michigan, like other states, faced
a difficult recession and reduced state tax revenues. State officials
desperately needed to save money and to generate more of it. Among other
techniques, they used privatization, most strikingly in 1995, when they
load-shedded a state-owned and -run worker’s compensation insurer, then known as Accident Fund of Michigan, from the government balance sheet.

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The Accident Fund (now known as Accident Fund Insurance
Company of America) was sold to Blue Cross Blue Shield of Michigan for $262
million, the largest such state-based privatization of its time. Previous to
privatizing Accident Fund, the largest known state asset sale involved a $56
million power plant in Wisconsin.

Accident Fund should never have been a public entity in the
first place. Other states left worker’s compensation to private, for-profit
businesses, and they still do today. But the seeds of Accident Fund’s
socialization were planted by the Michigan Legislature in 1912, when lawmakers
passed a bill making a centralized worker’s compensation fund possible.

Thus, the Accident Fund was established, and for more than
80 years, it was run independently of the government that had created it. As a
quasi-state agency, Accident Fund had its own private employees, and it was run
by people elected by policyholders, not appointed by bureaucrats.

All of that changed in 1989, when the Michigan Supreme
Court refused to hear a challenge to a 1976 ruling by the state attorney general
that Accident Fund was a state agency, and that its employees fell within the
state civil service system. Placing Accident Fund under state control had an
almost immediate impact on its operations. In a 1992 article, "Selling off the
Accident Fund," my colleague Lawrence Reed described the outcome:

The results were predictable:
political manipulation of rates and staffing, and reduced competition in the
industry as private insurers began to withdraw from the market. Because of civil
service rules it has been difficult for the Fund to fill key positions with
qualified experts. An unwarranted 20 percent rate cut ordered by the Blanchard
administration and timed to impact the 1990 election resulted in a $53 million
financial loss for the Fund that year.

Newly elected Gov. John Engler
called for privatization of Accident Fund during the first months of his
administration, and he fought hard to win the necessary legislative and legal
battles to get Accident Fund back into private hands.

Or at least semiprivate
hands. The winning bidder for Accident Fund was Blue Cross Blue Shield of
Michigan, an entity so regulated that it is practically an agency of state
government. The Mackinac Center for Public Policy once compared selling Accident
Fund to BCBSM to selling the state lottery to the University of Michigan.

The BCBSM enjoys tax-exempt
status that competing firms do not, which effectively ensures that people who do
not have BCBSM insurance are indirectly subsidizing those who do. Ideally, BCBSM
would become an investor-owned, private, for-profit business — a step the
company is legally permitted to take — and the state Legislature would take
other steps to free Michigan’s insurance market.

In fairness, it should be
noted that BCBSM’s regulatory advantages may be offset to some degree by
burdens, such as the mandate to insure companies regardless of health status.
Still, some believe that the benefits of converting BCBSM to an investor-owned,
for-profit business would be a net plus for insurance consumers.

Regardless, the sale of
Michigan’s Accident Fund was a slam-dunk for the state financially. It generated
a large, one-time revenue hike for the state treasury, while it increased, by
all indications, the quality of services provided to the fund’s many customers.

There isn’t a strong case to be made for government being
in the insurance business (or most other businesses, for that matter). Just five
states still operate monopoly workman’s compensation agencies: North Dakota,
Ohio, West Virginia, Washington and Wyoming. These states proscribe all
competition for workman’s compensation from private insurance carriers. Another
21 states operate workman’s compensation agencies, but allow some form of
private competition, just as Michigan did when the Accident Fund was a state
agency.

While Michigan was the first to sell off its worker’s
compensation insurance agency, it was not the last. Nevada began working toward
selling off its system as early as 1995, depending on how you define the start
of the transition. In 1999 the state passed enabling legislation to facilitate
the privatization of the worker’s compensation agency.

According to a press release from Nevada Governor Kenny
Guinn’s office, doing so removed 500 people from the state payroll. As of
January 1, 2004, state employers began receiving premium cuts of an average 12.4
percent. In addition, the state’s taxpayers were no longer on the hook for $1.6
billion in unfunded liabilities. West Virginia is scheduled to convert its
public system into a private, competitive one beginning in January 2006.
Officials expect an initial average drop in premiums of 15 percent as a result.

State insurance is not
required by U.S. Constitution, and it was never required by Michigan’s. The
state was wise to divest itself of its insurance albatross. Others would benefit
from doing the same.

#####

Michael D. LaFaive is director
of fiscal policy for the Mackinac Center for Public Policy, a research and
educational institute headquartered in Midland, Mich. Permission to reprint in
whole or in part is hereby granted, provided that the author and the Center are
properly cited.